Wills, Trusts & Estates Insights — Lindabury, McCormick, Estabrook & Cooper, P.C. Firm News & Events

Charitable Residuary Beneficiaries Under a Will

Published on: January 17, 2025 | by James K. Estabrook and Lindabury, McCormick, Estabrook & Cooper, P.C.

For many, designating a portion of one’s estate to charities and charitable purposes is an essential and significant part of their Last Will and Testament. Those seeking to make contributions to causes and organizations they are passionate about should be wary of the costs entailed in how such contributions are distributed. Under New Jersey law, when such contributions are designated in the form of a residuary bequest, the State Attorney General is required to exercise its power to protect the public’s interest in charitable gifts and seek costly accounting and lengthy review services, which ultimately drain the estate of funds it could have extended to the aforementioned charitable causes and organizations.

Under N.J. Ct. R. 4:80-6 and R. 4:28-4, the New Jersey State Attorney General is required to review and approve the accounting and administration of an estate when the estate leaves a residuary, or percentage, amount to a charitable organization. The Office of the Attorney General will require the filing of: (1) intermediate and/or final Accounting; (2) statement and calculations of any commissions paid to trustees or executors; (3) final distribution and disbursement schedule of bequests; (4) affidavit of any attorney’s and accountant’s rendered services; and (5) Refunding Bond and Releases executed by the charitable beneficiaries.

After receiving such documentation, the Attorney General’s office must approve the amount the charitable beneficiaries are being given, and such approvals could face backlogs and other administrative delays. Further, a thorough examination into the charitable organization could jeopardize its ability to receive its bequest and could even result in a court redirecting the bequest to a different charity under the cy pres doctrine, as a recent decision in the Appellate Division revealed. See Matter of Estate of Heinecke, No. A-3604-21, 2024 WL 1125186 (N.J. Super. Ct. App. Div. March 15, 2024).

Transfer Tax Exemptions for 2025

Published on: January 17, 2025 | by Anne Marie Robbins

On October 22, 2024, the IRS issued Revenue Procedure 2024-40 setting forth the inflation adjusted transfer tax exemptions for 2025. The Basic Exclusion Amount (BEA) will be $13,990,000. The increase means that in 2025, an individual may make gifts during life or at death totaling $13,990,000 without incurring gift or estate tax; a married couple will be able to transfer $27,980,000 of assets free of transfer taxes. The Generation-Skipping Transfer (GST) Exemption under section 2631 of the Code will also increase to $13,990,000.

The annual gift tax exclusion provided by Code section 2503 will increase in 2025 to $19,000 per donee (or $38,000 if spouses elect gift-splitting).

The gift tax annual exclusion for gifts to non-citizen spouses as set forth in Code sections 2503 and 2523(i)(2) will increase to $190,000.

“Smaldino v. Commissioner”: An Estate Planning Cautionary Tale

Published on: December 18, 2024 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

A recent Tax Court case, Smaldino v. Commissioner, T.C. Memo. 2021-127 (Nov. 10, 2021), emphasizes the need to ensure that the phases of transactions are completed properly, and certain formalities are observed in order for an estate planning strategy to be successful. It is important to be careful even (and perhaps especially) in the case of emergency planning (i.e., planning because of health scares or impending tax law changes).

In the Smaldino case, rushed planning caused a tax deficiency that may have been avoided with a team of advisors working together to ensure that Mr. and Mrs. Smaldino’s plan was properly implemented.

Mr. and Mrs. Smaldino were married in 2006. Mr. Smaldino had six children from a prior marriage and 10 grandchildren. Mr. Smaldino was a CPA turned real estate investor, with a real estate portfolio worth approximately $80 million. Mrs. Smaldino held a master’s degree in economics and had worked in her husband’s business for many years.

Crisis Management: Safeguards to Protect Against Financial Elder Fraud

Published on: December 18, 2024 | by Elizabeth Engert Manzo

In an era where digital transactions are becoming increasingly prevalent, the mechanisms by which financial institutions inform customers of potential fraudulent activities are under scrutiny. Recently proposed revisions seek not only to bolster security measures but also to ensure that customers are promptly and clearly notified, thus minimizing the risk of financial loss.

Possible Changes to Bank’s Notice of Suspected Fraud Under Review

On the first day of the 2024 New Jersey legislative session, Assembly Bill No. 1832 was introduced and referred to committee. If approved as enacted, A1832 would require financial institutions to release financial records to adult protective services if there is suspected fraud of a vulnerable adult or senior customer. It would also permit adult protective services to release these records to law enforcement, where necessary.

Trusts in New Jersey – Understanding the Duties and Responsibilities of New Jersey Trustees

Published on: October 15, 2024 | by Anne Marie Robbins

As a general rule, trusts are created in one of two ways. Inter vivos trusts are established by an agreement or declaration during the life of the creator (called the “grantor” or “settlor” of the trust). Testamentary trusts are created in the will of a testator and do not exist until the testator dies, the will is probated, and the executor of the will transfers assets to fund the trust. Testamentary trusts are irrevocable and cannot be changed except in limited circumstances, whereas inter vivos trusts may be revocable (i.e., may be amended or terminated) or irrevocable.

In New Jersey, a trustee is entrusted with significant responsibilities that require not only the proper management and distribution of assets but also the fulfillment of strict fiduciary obligations. Whether the trustee is an individual or a corporate entity, the role demands a high level of diligence, integrity, and accountability. For beneficiaries, understanding a trustee’s duties is essential to ensure that their rights are protected, while for trustees, knowing the full extent of their responsibilities is crucial for effective administration.

The trustee’s role lasts the length of the trust’s duration, or until the trustee sooner resigns, dies, or is removed.

CCA 202352018 – A Cautionary Tale

Published on: June 25, 2024 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

Since passage of the Uniform Trust Code in New Jersey in 2016, planners now have an established procedure to modify or terminate an irrevocable trust, and it is undoubtedly a valuable tool. Clients frequently have trusts that could be made better if one or two changes were made. However, while attractive, the modification or termination of an irrevocable trust so that the trust will accommodate circumstances unforeseen when the trust was created, can have unintended gift tax consequences.

It was just such a situation that a recent Memorandum issued by the Chief Counsel for the IRS, CCA 202352018 (hereafter the CCA or Memorandum), addresses. In that Memorandum the grantor of the trust established an irrevocable trust for her child for the child’s life. The trustee had the power to distribute income and principal to the child, in the trustee’s discretion, and on the child’s death the trustee was directed to distribute the proceeds to the child’s descendants. The grantor had no right to income or principal from the trust and essentially had relinquished all control over the assets in the trust. As such, the grantor appeared to have successfully removed the assets in the trust from her taxable estate.

The trust included a provision that made the trust income taxable to the grantor under section 671 of the Internal Revenue Code. Using such a provision in a trust is actually very popular. Because the trust will not pay any income taxes, the trust can grow more quickly. In effect, it is as if the grantor is making a tax-free gift to the trust each year in the amount of the tax the trust would otherwise have paid. Sometime after the trust in the CCA was operational, however, the grantor no longer wished to pay those income taxes and instead sought to have the trust reimburse her for those tax payments.

Supreme Court Ruling Sparks Urgency in Reassessing Buy-Sell Agreements for Closely Held Companies

Published on: June 25, 2024 | by Anne Marie Robbins

Ensuring the seamless transition of ownership and safeguarding a company’s stability is of paramount importance to any closely held business. Buy-sell agreements play a crucial role in achieving these objectives. These agreements dictate the terms under which shares of the business can be bought or sold, typically triggered by events such as death, disability, retirement, or voluntary departure of an owner. A recent decision by the United States Supreme Court necessitates that owners of closely held businesses review their buy-sell agreements, particularly those that involve using life insurance proceeds to purchase a deceased shareholder’s interest in the company.

In a unanimous decision issued on June 6, 2024, the Supreme Court held that life insurance proceeds payable to a corporation are includible in the corporation’s value for Federal Estate Tax purposes, with no offset allowed for the obligation to purchase a deceased shareholder’s interest. Estate of Connelly v. United States, 602 U.S. ___ (2024) (No. 23-146, June 6, 2024).

Michael and Thomas Connelly were the owners of Crown C Supply, a building supply corporation (the “Company”). Michael was the CEO and owned almost 80% of the stock, with Thomas owning the rest. The brothers had entered into a buy-sell agreement that was to be effective in the event of their deaths. Under the agreement, the surviving brother was given the option to purchase the deceased brother’s shares. If he did not do so, the Company itself would be required to redeem the shares. The Company obtained life insurance policies of $3.5 million on each brother.

Crisis Management: Safeguards to Protect Against Financial Elder Fraud

Published on: April 15, 2024 | by Elizabeth Engert Manzo

In an era where digital transactions are becoming increasingly prevalent, the mechanisms by which financial institutions inform customers of potential fraudulent activities are under scrutiny. Recently proposed revisions seek not only to bolster security measures but also to ensure that customers are promptly and clearly notified, thus minimizing the risk of financial loss.

Possible Changes to Bank’s Notice of Suspected Fraud Under Review

On the first day of the 2024 New Jersey legislative session, Assembly Bill No. 1832 was introduced and referred to committee. If approved as enacted, A1832 would require financial institutions to release financial records to adult protective services if there is suspected fraud of a vulnerable adult or senior customer. It would also permit adult protective services to release these records to law enforcement, where necessary.

Impact of Artificial Intelligence on Estate Planning Attorneys

Published on: March 18, 2024 | by Anne Marie Robbins

Artificial intelligence (AI) is in the beginning stages of a revolution. For the better part of the last century, this technology saw little application outside of data analytics and computer algorithms.

Today, AI can replicate real communication with surprising ease. ChatGPT, for instance, is known for its ability to draft essays and summarize long passages from a book in mere seconds, a boon for many a student. Recently, ChatGPT even passed the uniform bar exam on its first attempt. Which begs the question, will this technology replace estate planning attorneys? If you ask ChatGPT yourself, you might be surprised. We typed “I have a legal question” in the search bar, and nearly instantaneously ChatGPT responded, “Sure, I can try to help. Please keep in mind that I’m not a lawyer, and my responses are not a substitute for professional legal advice.”

Still curious, we pressed on, and asked ChatGPT the following question:

Converting Excess 529 Plan Account Funds to a Roth IRA

Published on: March 18, 2024 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

A 529 plan account is a tax-efficient way to save for a child’s or grandchild’s education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. 529 plan accounts have multiple tax advantages, including allowing an individual to contribute up to $18,000 per year, or $36,000 per married couple. These contributions are considered gifts to the beneficiary of the account but are not taxable because they qualify for the so-called “annual exclusion” from taxable gifts. The investments in the 529 plan grow tax-deferred, and withdrawals are not subject to income tax when used for qualified educational expenses.

Considering the high cost of education today, it may seem unlikely that any assets in a 529 plan account would go unused. However, if an account’s beneficiary decides not to attend college, attends a more affordable school, or receives a significant scholarship or financial aid, it is possible there would be funds remaining in the 529 account when the beneficiary’s education is concluded. Withdrawals from 529 accounts that are not used for qualified educational expenses are subject to income tax and excise tax of 10% on the earnings portion of the withdrawals. Certain exceptions to the 10% penalty apply. To avoid the income and excise taxes, account holders have the option to change the beneficiary of the 529 account to an eligible relative of the original beneficiary, such as a sibling, child, or other descendant. Beginning in January of 2024, another option that avoids the income and excise taxes is to roll over the amount remaining in the 529 account to a Roth IRA. Whereas amounts withdrawn from 529 accounts may only be used for qualified educational expenses, withdrawals from Roth IRAs do not have restrictions on their use.

In the Setting Every Community Up for Retirement Enhancement Act 2.0 (“SECURE 2.0”) enacted by Congress at the end of 2022, it is now possible to roll over 529 plan account assets to a Roth IRA in the name of the account beneficiary, free of income and excise taxes.